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The Systemic Benefits of Islamic Banking and Finance Practices: A Comparative Study

In: Global Financial Crisis and Its Ramifications on Capital Markets

Author

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  • Mehdi Sadeghi

    (Macquarie University)

Abstract

An emerging literature in the aftermath of the recent GFC has attempted to investigate whether growing Islamic banking and finance practices add any systemic benefit to the global economic system. This paper explores the issue by examining the determinants of systemic risk for a sample of Islamic banks and financial institutions compared with conventional counterparts. Systemic risk is defined as a function of the stock market capitalization, marginal expected shortfall, leverage ratio, correlation of return, and volatility of return. Our finding shows the impact of market capitalization on reducing the systemic risk of Islamic banks and financial institutions is relatively higher than conventional counterparts. This is consistent with the results of some previous studies on the perceived benefits of Islamic finance practices. However, the influence of leverage ratio and marginal expected shortfall on systemic risk of Islamic banks and financial institutions is not significantly different from the results for banks and financial institutions in the control samples. Overall, our result provides some support for the notion that Islamic banking and finance practices can provide more systemic benefit to the financial system than conventional counterparts.

Suggested Citation

  • Mehdi Sadeghi, 2017. "The Systemic Benefits of Islamic Banking and Finance Practices: A Comparative Study," Contributions to Economics, in: Ümit Hacioğlu & Hasan Dinçer (ed.), Global Financial Crisis and Its Ramifications on Capital Markets, pages 387-400, Springer.
    • Handle: RePEc:spr:conchp:978-3-319-47021-4_27
    DOI: 10.1007/978-3-319-47021-4_27
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